What a Nebraska Farmer Could Teach Politicians in Washington about Bailouts
Grand Rapids MI (Webwire) 3/13/2009--The government’s controversial bailout of troubled financial services company AIG represents an investment strategy that should give American citizens pause, according to veteran financial advisor Dennis Tubbergen.
On his financial blog at http://www.Dennistubbergen.com, Tubbergen explains the flaws behind the government’s bailout strategy with an analogy about a fictional Nebraska farmer.
“We have taxpayers who have practiced good spending habits, much like Fred, who are being punished as their taxes bail out corporations. What’s happened to the principle that my Mom used when attempting to change my behavior?” Mr. Tubbergen asks. “‘Reward the behavior that you want and punish the behavior you don’t want.’ Seems to me that the government has rarely, if ever, used this principle.”
The bailout so far has cost taxpayers $182.5 billion, according to a March 23, 2009 Bloomberg article. And as of last week, AIG’s total market capitalization was about $3.7 billion.
Market capitalization is calculated as the total shares of stock outstanding times the current share value, Tubbergen explains.
And since AIG has approximately 2.7 billion shares of stock outstanding, the company could potentially be purchased for approximately $3.7 billion - but the government has invested more than $180 billion of taxpayer’s money for a stake of 80 percent, according to Tubbergen.
That’s $182.5 billion, so far, for a company that could likely be purchased for $3.7 billion.
In his latest blog post, Tubbergen talks about what a Nebraska farmer could tell Washington Politicians about bailouts.
Farmer Fred works hard, lives frugally, and because of that, has managed to accumulate some money - but he is conservative with his finances and doesn’t borrow money for luxuries that he doesn’t need.
Farmer Fred drives an older Cadillac Deville for which he paid cash, Tubbergen explains. He could afford a new car but his old car his running just fine so he sees no need to buy a new one. He also knows that if he traded it in he’d only get $2,500, so there’s no point in doing so.
But one day the old Deville breaks down and it turns out it will need major repairs. Fred gets numerous repair estimates and finds out that it will cost him about $4,500 of engine and transmission repairs.
Now, Fred has common sense, and he realizes that it makes no sense to spend $4,500 on a $2,500 car.
Unfortunately, the bureaucrats in Washington didn’t choose to consult with someone like Farmer Fred before they invested $182.5 billion for an 80 percent a $3.7 billion company.
But, Tubbergen notes, it’s safe to say that someone like Fred would have made very different choices as to where to put taxpayer dollars.
Advisory services offered through USA Wealth Management, LLC, a federally registered investment advisor.
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